Mahindra & Mahindra shares witnessed their steepest decline in four months on Tuesday, January 27, as concerns over the India-European Union Free Trade Agreement's impact on the domestic automotive sector weighed heavily on investor sentiment. The stock emerged as the biggest laggard on both the Nifty 50 and Nifty Auto indices.

Stock Performance Impact

The automotive major's shares fell up to 5% during Tuesday's trading session, marking a significant retreat from recent highs. The stock was trading 3.3% lower at ₹3,424.7 as it attempted to recover from the day's lows.

India-EU Trade Agreement Details

The India-European Union Free Trade Agreement has emerged as the primary catalyst behind the stock's decline. Under the proposed agreement, import duties on cars from the European Union will be substantially reduced, creating increased competitive pressure for domestic manufacturers.

The agreement includes separate quotas for Electric Vehicles, Internal Combustible Engines (ICE), and Heavy Commercial Vehicles. India will benefit from duty-free access for its car exports to the EU, with export quotas 2.5 times higher than the EU's quota to India.

Goldman Sachs Assessment

According to Goldman Sachs analysis, the trade agreement's impact will be most pronounced on brands with significant presence in the premium executive and luxury segments, particularly vehicles priced at ₹23.2 lakh and above. The brokerage firm specifically projects a 1.9% impact on Mahindra & Mahindra's profitability.

The assessment highlights Mahindra's significant exposure to the premium segment through popular models such as the XUV700 and Scorpio, which compete directly in the price range most vulnerable to increased European competition.

Implementation Timeline and Company Response

The India-EU FTA will only take effect from 2027, as legal proceedings and the ratification process need to be completed. This provides domestic manufacturers with time to strategize and adapt to the changing competitive landscape.

Mahindra & Mahindra has not officially clarified the overall impact of the deal on its financials, leaving investors to rely on third-party assessments for guidance on potential implications.

Anthony Heredia, managing director and chief executive officer of Mahindra Manulife Mutual Fund , expects equity market returns to be 2-3% higher than nominal GDP growth going forward. Speaking on market outlook and investment strategy, he noted that India's relative valuations are beginning to turn attractive in dollar terms after underperforming global peers for a year amid high valuations and low earnings growth.

Q3FY26 Earnings Assessment

Regarding the Q3FY26 (October-December) earnings early-bird numbers, Heredia observed that while revenue is up, net profit growth has lagged. He attributed this differential to one-time effects of provisions to comply with new labour laws, explaining that most earnings reported so far have been from larger companies and no significant negative surprises are expected from remaining results.

Portfolio Strategy and Sector Focus

The fund manager maintains a large-cap biased portfolio stance, driven primarily by valuation considerations. His current sector preferences include:

• Financials
• Consumption
• Information technology (IT)
• Commodities
• Manufacturing export-oriented businesses (subject to free trade agreement outcomes with the European Union and the US)

Given that sector rotation is playing out over shorter time cycles, Heredia emphasized that their core approach continues to be bottom-up stock selection.

Investment Allocation Recommendations

Heredia advocates for multi-asset products to be at the core of future incremental allocation, particularly over the next couple of quarters, citing recency bias that investors have toward gold and silver.

Fund Performance and Market Outlook

All equity funds under management, including mid and small-cap funds, have performed well over the past year. The multi-asset allocation fund has also delivered strong results. Heredia expects flows to moderate for fresh offerings, noting that extensive IPO supply is weighing on secondary markets amid global headwinds.

For mutual fund flows, he anticipates preference toward multi-asset and flexi/multi-cap diversified funds, while not expecting significant changes given large SIP anchor flows.

Policy Expectations and Foreign Investment

While declining to comment on specific budget measures, Heredia suggested that policy measures aimed at boosting foreign capital flows could help create economic momentum. He believes significant groundwork has been done to boost manufacturing, infrastructure capex, and consumption, with results expected to play out in the medium term.

Regarding foreign investor sentiment, he noted that recent geopolitical events and volatility in bond and currency markets have made investors more deliberate about committing future capital. However, he maintains that the core premise of the Indian economy offering a wide consumer base with positive demography, reform agenda, and world-class infrastructure remains intact.

Technology and AI Investment Perspective

On artificial intelligence investments, Heredia observed similarities between AI evolution and internet adoption from the early 2000s, expecting AI to follow a similar but accelerated timeline. He noted that while significant developments are occurring, not everything is being publicly disclosed. The challenge lies in AI providers competing to create future capacities while monetization remains uncertain, making it difficult to identify eventual winners.